The Bank of Canada locked in its first interest rate increase in about three years this October, with a 0.25% rise in its target rates.
The change is intended to help combat inflationary pressures and pump the brakes on rising costs, which have been worsened by ongoing global conflicts. The latest change increased target interest rates from 2.25% to 2.5%, raising the rate banks charge each other for lending after a months-long holding pattern.
The decision marked a shift in the central bank’s approach after an extended period of holding rates steady, as policymakers responded to renewed inflationary pressures, rising energy costs and ongoing global trade uncertainty.
Overall Inflation Ticked Up in September Across Canada
Historically, interest rates have been manipulated to stimulate or soften economic forces. Although many factors go into interest rates, inflation is a significant contributor to how the BoC sets target rates and for what purpose.
From August to September, the annual inflation rate across all goods increased from 3% to 3.1%. In addition to a month-over-month increase, this rate represents a year-over-year increase, with last September’s rate coming out to 2.4%. At the same time, energy-related inflation edged down slightly from August to September, from 2.4% to 2.2%, which is down 2.6% from September 2025.
Despite the decrease, price shifts can take 12-18 months to work their way up the production chain, meaning we’ve likely yet to see the full trickle-down impact of higher oil and gas prices on day-to-day consumer products. This means that even as the energy crisis eases, prices are likely to inflate further as energy costs catch up with producers and get passed on to customers.
Ultimately, rising inflation generally leads to higher interest rates in an attempt to control the market. This typically translates to fewer home sales, which have the potential to further soften the housing market moving into the winter.
BoC Surveys Show Softer Consumer Spending, Hiring Trends
Recent survey results from the BoC reveal what Canadians are really worried about in the coming months.
The BoC’s Q3 2026 Consumer Expectations Report found that tariffs and trade barriers were the top concern driving inflation, followed by oil and energy prices. Those rankings were reversed in the previous quarter, likely in response to increased tensions seen in the Middle East earlier this year.
Additionally, long-term predictions for inflation have caught up to short-term predictions, meaning there’s less confidence in the issue of inflation being solved in the next five years. While respondents reported they expect their financial health to increase, much of that was derived from lower consumer spending intentions.
The sentiment from businesses actually increased from Q2, with 20% of respondents reporting more favourable business conditions in Q3 compared to 14% in Q2. Indicators on firm sales also increased, and investment plans remained strong, but this was offset by softer hiring intentions. This is in line with recent unemployment rate changes, which increased from 6.4% in August to 6.5% in September.
Overall, these reports point to rising concerns about trade wars or tariffs increasing inflation across the nation, leading to more cautious consumers. On the other hand, businesses reported gains in Q3, but those haven’t necessarily translated to increased hiring to ease the issue of rising unemployment rates.
How Bank of Canada Decisions Relate to U.S. Rates
Although each country sets their own rates, historically their target rates tend to move together. On Sept. 16, the U.S. Federal Reserve Bank raised its target interest rates by 0.25% to a target of around 3.75%-4%. Given the tendency to move together, this led many analysts to believe a rate increase in Canada was likely in October or December.
Higher U.S. interest rates can put upward pressure on Canadian bond yields and influence the Canadian dollar, affecting borrowing costs and import prices. These cross-border effects are especially relevant when both countries face inflationary pressures connected to energy prices and international trade.
That being said, the economic factors influencing each country’s decision do differ based on unemployment rates, GDP growth, trade tensions and more.
What Higher Rates Mean for the Housing Market
The rate decision is expected to deliver another blow to the already slowing housing market across Canada, which faced an 8.3% year-over-year decline in home sales in September, according to the Canadian Real Estate Association. Additionally, September also showed softening sales prices, with a 1.4% decline year-over-year.
These figures showed that the housing market was already facing headwinds before the October decision. Higher borrowing costs could add to those pressures by reducing the amount prospective buyers can qualify to borrow and increasing monthly payments for some variable-rate mortgage holders.
For buyers, reduced competition could create opportunities to negotiate prices, request conditions and take more time to evaluate properties. However, any savings on a purchase price must be weighed against mortgage costs and other expenses associated with homeownership.
How These Changes Impact Homebuyers
For prospective homebuyers, the October rate increase reinforces the importance of assessing affordability under different interest-rate scenarios.
Buyers considering a variable-rate mortgage should determine whether their budgets could accommodate further increases in borrowing costs, while existing homeowners approaching mortgage renewal should also review their options early.
“When rates are this volatile and unpredictable, home buyers and homeowners facing a renewal should strongly consider arranging a rate hold through a mortgage broker,” Jarvis said. “Locking in a rate cushions you against further rate increases, which can otherwise lead to some nasty surprises.”
Ultimately, the BoC’s October decision underscored the difficult balance between controlling inflation and supporting economic activity. The direction of Canada’s housing market through the remainder of 2026 will depend not only on interest rates, but also on employment, household confidence, inflation and the availability of homes.
